Make It Better Media Group Founder and Chief Visionary Officer Susan B Noyes recently spoke with Thomas Frank and Craig Ayers, two experienced investors from Whittier Trust in San Francisco, about how they help clients align their personal values with their investment portfolios through socially responsible investing during the virtual event “Is Doing Good, Good for Your Portfolio? Unpacking ESG Investing.” Known as ESG investing, which stands for environmental, social and (corporate) governance, this type of investing prioritizes financial returns alongside a company’s impact on the environment, their employees and the planet.
According to Frank, virtually all investment vehicles now have access to ESG investing, as the fiduciary rules have evolved to view it more positively. “Impact investing is an effective tool to address and positively impact the critical issues facing the environment and society,” he says.
In fact, ESG has recently been in the headlines after the SEC released a new proposal on rules governing ESG and how corporations report data. “These days, you want to align your values with your investments, but you also get increased corporate climate change transparency,” Ayers says. “We’re getting better and better data as companies are being asked for information, such as how much carbon footprint they need, how they treat their employees and what their diversity is like. It helps us better understand those risks and opportunities.”Here’s a look at what Frank and Ayers spoke about during the virtual event.
What is the History of ESG Investing?
While it’s become more popular in recent years, ESG can be traced all the way back to the 1700s when Methodists and Quakers used what’s called “negative screens” to avoid investing in alcohol, tobacco and gaming.
But the anti-apartheid movement in the 1980s helped solidify the idea of ESG investing. “If you were around then, you’ll remember the boycotts and real social activism around making investments in companies that did business with South Africa,” Frank says. “There have been all kinds of developments since then, including the Domini Social Index, which was created in the 1990s and remains a benchmark for socially responsible investing.”
Today there are more than $17 trillion dollars in sustainable investment spanning all asset classes – not just regular stocks, bonds and mutual funds but also private equity, private debt, clean water projects, sustainable agriculture, green building and more.
Over the past decade, growth has increased almost 19 percent as ESG gains more credibility with investors. “People are on board with this,” Ayers says. Often people think that ESG investing means accepting lower returns or limiting investment options, but these are misconceptions, explains Ayers. In fact, the MSCI 300 Social Index has outperformed the S&P 500, which Ayers shows in his presentation.
What Are the Different Approaches to ESG Investing?
According to Ayers, different ways to approach ESG investing include:
- Impact Investing: This is an investment strategy that seeks to achieve environmental or social goals, as well as generate profit. It’s often used as a general term for many ways to invest according to personal values.
- Activist Investing: This type of investing seeks to engage and influence the management at a company to drive positive change.
What Are the ESG Metrics?
There are guiding metrics to help identify companies that are leaders, that are better managed, more forward thinking, better at managing risk and more focused on the long term. “For example, if you think about a firm that is sourcing coffee beans from an area that is not well water-resourced, eventually the coffee beans will run out and they’re going to deplete that resource,” Ayers says. “They have to be very careful about where they’re going from an environmental perspective and about using those resources.”
Environmental factors to consider when deciding whether a company is an ESG-worthy investment include resource depletion, deforestation, waste and pollution, climate change, greenhouse gas emissions, recycling and reforestation. Then there are also social factors, such as working conditions, local and indigenous community impacts, the health and safety of employees, sustainable supply chain policies and employee compensation (aka living wage).
Company governance must also be considered: Executive compensation – it is egregious? Does the company participate in political lobbying? Does it have a diverse Board? What about its audit controls, transparency and tax strategy?
Ayers says not to be persuaded from ESG investing because you hear tales of greenwashing. “Yes, companies do sometimes misrepresent or oversell their efforts,” he says, “but as that happens, they get caught and forced to go back and actually do good environmental social governance. There are watchdogs out there looking at these companies.”
ESG Investing — The Bottom Line
Aligning personal values with financial investments continues to be one of the highest growth areas of investing, and there’s a reason for that: It’s working. “There are many ways to approach impact investing, including using it as a tool to analyze investments and enhance returns, which is what we do,” Ayers says. “Investors are actually influencing company policies and managements with corresponding beneficial social and environmental impacts.”
Moving your portfolio over to ESG can be a journey. Ayers suggest starting out by focusing on a hot button topic you are concerned about. “For a lot of people, it’s fossil fuels,” he says, “so we will focus on that and be sure to have fossil fuels out of their portfolio, and then we will look at their risk and let them know what to expect. Long term, they will do just fine.”
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Carrie Ruehlman is a former magazine editor and communications professional turned freelance writer and editor. In her spare time, she enjoys spending time with her two daughters and husband, Michael. She also serves on the board of The Tiny Miracles Foundation.